Thursday, May 27, 2010

Last September, we wrote that "the Market" was again embracing Yahoo! (YHOO), evidenced by a higher share price and Wall Street brokerage upgrades to "Buy" from "Hold" (*although mixed views remain - WSJ's Heard on the Street column today: Yahoo's Chase to the Bottom). Since last fall, the same thing has happened with a number of companies, including Starbucks (SBUX).

In April, the coffee chain received more attention on the back of improved results -- upgrades and/or higher estimates and "target prices" -- from TheStreet.com:

Starbucks (SBUX) upgraded at Jesup & Lamont from Hold to Buy. $32 price target. Company is seeing better sales across the globe.

Of course, the stock's already had a fantastic run over the past year - two year chart from Yahoo! Finance:

Hindsight is 20/20, but the time to buy was in late 2008 or early 2009. We personally can't claim too much credit as we didn't purchase the stock -- our funds were tied up and/or allocated elsewhere, including other totally discarded names. However, we did advise family to purchase shares in the company in the low teens and below with the following summary thesis:

We know plenty of loyal Starbucks patrons and continue to see long lines at the ubiquitous franchise everywhere. Looking beyond the current economic downturn, odds seems fairly certain that Starbucks will remain “brand-addictive” and generate significant free cash flow for years to come, especially as the company dials back capital expenditures. We expect share buybacks will continue and see potential for a dividend.

Although we still like the franchise and would love to own a piece of Starbucks, we'll take a pass, even with the recently announced dividend (1.6% current yield). At 19-times consensus fiscal 2011 EPS and with modest forward growth expectations, shares are likely in a fair value range.

The Market has come around to the idea that (1) competition from McDonald's (MCD) and Dunken Donuts won't kill a resilient Starbucks, and (2) even a fairly mature franchise can return significant capital to shareholders over time. On the latter point, think of Berkshire Hathaway's (BRK-A, BRK-B) Dairy Queen. DQ is likely a slow growth business that faces constant competition from Friendly's, Sonic (SONC), Cold Stone Creamery, and all the rest, yet the company no doubt generates gobs of free cash flow that Berkshire can invest as it pleases.

What companies will the Market embrace next? Hard to know for sure. We mentioned the other week that the Market is coming around to our shipping companies, including Seaspan (SSW). Despite economic jitters resurfacing almost daily -- with headlines such as "Market Down on Renewed Europe Concerns" followed by "Stocks Jump After China Shows Confidence" -- our view is that conditions are on the mend. This view is supported by hard data and various economic indicators -- give a look at this, from the Conference Board today for Europe:

Of course, tomorrow or Monday, headlines may read "Stocks Down on New Risks in Europe [or elsewhere]".

Ignoring volatile, macro-related headlines to focus on corporate fundamentals and intrinsic values, we continue to believe that 1-800-Flowers.com (FLWS) and even totally discarded Bidz.com (BIDZ) remain at meaningful discounts to reasonable estimates of fair value. In each case -- while acknowledging that a weak consumer environment is an ongoing risk -- we see stabilizing results for established, well-positioned e-commerce franchises. Both have healthy balance sheets and potential for a return to Y/Y growth later this year, which might garner more Market attention. We've been wrong on Bidz.com over the past year, but we remain patient and are aware that illiquid micro-cap companies may swing widely and/or remain out of favor for extended periods of time. Lastly, although some insiders continue to quietly sell through "automatic" plans -- which we don't like, even if only slightly reducing their approximate >60% ownership position -- many other overhangs on the Bidz story are now gone and, as noted, fundamentals are poised for improvement.

No comments:

Post a Comment

About Blog

Common Stock $ense was created by Jeffrey Walkenhorst to periodically share investment ideas and views, and contribute to the community of investors dedicated to fundamental analysis and active portfolio management.Copyright 2009, 2010, 2011.All rights reserved.

Follow via RSS, Twitter, Facebook:

Search This Blog

Loading...

Wikinvest Wire

Approach

Investment strategies and styles abound today, many of which are focused on short-term, trend trading without regard to the underlying business or its value. At CommonStock$ense, we believe investing in Common Stocks as abusiness ownernot only makesCommon Sense, but can significantly compoundCents into Dollarsover time. Rather than viewing stocks merely as pieces of paper for trading, our approach is to invest as owners of(1) high quality,(2) franchise businessescapable of generating(3) high returns on equityand(4) large, predictable free cash flowthrough economic cycles with(5) limited capital requirementsand(6) capable managementteams. We strive to establish equity positions in such businesses at a(7) substantial discount to our estimate of fair valueby taking advantage of changes in investor sentiment and market volatility, and/or temporary corporate setbacks. Finally, we generally seek companies with(8) limited to no debt.

Two caveats:every now and then, we may invest in (1)off-the-run, smaller franchise companiesthat we believe have sustainable competitive advantages and are trading significantly below the valuation an informed private market buyer would be willing pay for the entire business; and, (2) companies that havevaluable, differentiated physical assetswhere we see ameaningful margin of safetyrelative to normalized asset values.

Our own experience at CommonStock$ense suggests that anowner-oriented investment approachleads topreservation of capitalandfavorable long-term returns, as well assound sleep at night. For helpful reference links, please also see CS$ companion site, The Discriminant Investor.